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Daily Newsletter, Monday, 07/22/2002

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The Option Investor Newsletter                   Monday 07-22-2002
Copyright 2002, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


Posted online for subscribers at http://www.OptionInvestor.com
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MARKET WRAP  (view in courier font for table alignment)
*******************************************************************
07-22-2002               High    Low     Volume Advance/Decl
DJIA     7784.58 -234.68 8103.86 7717.29 2517 mln   617/2553
NASDAQ   1282.65 -36.50  1332.10 1272.46 1737 mln  1067/2351
S&P 100   407.88 -15.22   426.21  405.47   totals  1684/4902
S&P 500   819.85 -27.90   854.13  813.26
RUS 2000  379.65 - 6.55   389.11  374.69
DJ TRANS 2241.50 –90.68  2357.78 2215.89
VIX        48.23 + 4.78    49.67  42.81
VIXN       62.58 + 1.41    63.61  62.58 
Put/Call Ratio 0.87
*******************************************************************

We've Fallen and Can't Get Up

If you were as bad with the yo-yo as I was, you remember what 
it's like to see it hanging at the bottom of the string, spinning 
around, defying your attempts to get it to wind upward.  I 
usually got it to go down and up a few times, but always ended in 
this manner.  The market had a day much like my yo-yo experience.  

As we ended last week, the Dow had rebounded to close over 8000.  
The proverbial line in the sand seemed in place.  This morning we 
started off hovering around the even mark, before dropping 300 
points. Friday's break through last September's lows was in the 
rear view mirror and getting farther away.  The Dow bottomed at 
7717.29 before roaring all the way back into positive territory.  
The bulls had their rally and looked to start a market 
turnaround.  It didn't last long, however, as the market lost its 
grip and fell back over 200 points.  It closed down 234.68 at  
7784.44, and its next support level looks to be around 7400.

Monthly Chart of the Dow Jones


 


As for the S&P 500, it was just last week we were talking about 
support at 900.  It appears now that we may be testing the 800 
level very soon. The S&P 500 closed just above its intraday low 
of 813.26, to settle at 819.83.  This, however, wasn't a bounce 
off of support.  The index closed heading downward, after 
rallying back up to 842, only to be slapped down by some very 
aggressive bears.  Looking at a long-term chart, dating back to 
March of 2000, we see a trendline pointing to approximately the 
700 level for the S&P, which would coincide with support levels 
from early 1997.  Now that we've approached support at the 800 
level within a week of breaking 900, 700 seems reasonable before 
our next consolidation.

Monthly Chart of the S&P 500



 

Does this mean we are headed straight down?  Not necessarily.  We 
have seen almost 1600 points shaved off the Dow in the last 11 
trading sessions.  We could see quite a bounce, before giving 
into pressure, or until the bulls run out of steam.  With no 
major economic releases between now and Thursday, when new and 
existing home sales, as well durable goods and 2nd quarter 
employment cost index are released, we could see a rebound over 
the next couple of days.

Some news that weighed on today's market undermined investor 
trust once again.  Congressional investigators are looking at the 
roles of Enron's bankers in hiding massive losses.  The 
Washington Post reported that Enron raised more than $5 billion 
in cash from Citigroup, J.P. Morgan, and other banks, which was 
labeled as energy trades.  They used a complex transaction, known 
as prepays, which helped hide some of Enron's debt.  In exchange, 
the banks collected interest and fees.  Enron collected advance 
payments from the banks, for future supplies of natural gas and 
other commodities. It then used the money to improve cash flow, 
rather than listing it as debt.  These arrangements will be 
reviewed during a Senate hearing tomorrow.

Citigroup's Salomon Smith Barney also came under fire today from 
the NASD, which is investigating high profile analyst Jack 
Grubman, who kept a buy rating on Winstar Communications, even as 
the company was headed for bankruptcy.  At issue is the possible 
conflict of interest in an analyst keeping up his rating on a 
company, in exchange for profitable investment banking business.  
This type of arrangement was thrust into the spotlight with 
Merrill Lynch's $100 million settlement with the New York 
Attorney General's office.  This news weighed heavily on the 
sector with the Securities Broker Dealer Index ($XBD.X) losing 
over 3% on the day.

Another Grubman darling, WorldCom, finally made it official.  The 
company filed the largest ever bankruptcy petition at $107 
billion, almost doubling Enron's total.  This, along with 
BellSouth's reduction in estimates for the year, weighed heavily 
on the telecom sector, with North American Telecom Index losing 
almost 6%, taking down companies such as Verizon (VZ) $28.65    
(-3.85), and SBC Communications (SBC) $23.96 (-2.72).

As further evidence of investors "run for the hills" mentality, 
almost $40 billion dollars flowed out of equity mutual funds last 
month, the third largest outflow on record, while bond funds 
attracted $18 billion in new investments.

After hours earnings releases left the market pretty much where 
it ended the day. In the latest guidance warning, Computer 
Associates beat 1st quarter estimates, however lowered its full 
year revenue forecast and stated what most market watchers 
figured out a while ago, that "it appears that an economic 
recovery will take longer than originally anticipated."

Novellus reported that profits fell more than 80% from last 
year's second quarter.  Shares were down over $2 from a close of 
$29.55 to $27.50.  CEO Richard Hill said that customers were 
concerned about the economy and cautious about their ability to 
spend in this environment.  2nd quarter profit fell to $12 
million from year ago profits of $59.2 million.  These numbers 
were in line with expectations.

Texas Instruments (TXN), the number one maker of semiconductors 
for cellular phones, released earnings, which were also in line 
with expectations. However, its shares traded up slightly after 
more than doubling profit from a year ago.  TXN's second quarter 
revenues also increased by $335 million over the first quarter.  
The company said this increase was due to gains in all of its 
business segments.

The Market Volatility Index ($VIX.X) has reached new relative 
highs once again.  The index closed today at 48.23, gaining 11% 
on the day.  Higher levels in the VIX are usually bullish, as 
they forecast market bottoms.  However, the last couple of times 
the VIX was this high, it kept going.  Last September it reached 
57.31, before settling back down as the market bounced back from 
its September lows. In October 1998, during the "Asian Flu" and 
Long-Term Capital's problems, the VIX hit 60 before coming back 
to earth.  In October 1997, we saw a high of 51. The pattern 
heading into the fall has been for the market volatility to spike 
in September and October.  This is something to note as we get 
closer to the fall.

Chart of the Market Volatility Index


 


If the markets do bounce, don't expect the VIX to come falling 
down right away.  Traders will look for continuing reassurance 
that the market has found a bottom before they are willing to 
sell options at lower levels, knowing how much a short option 
position can cost in a highly volatile market.  The put/call 
ratio of .87 is still relatively high, although off its highs 
over 1 last week.  This represents the number of puts traded per 
call.  In low volatility markets, there are many more calls 
traded than puts.  At the beginning of the week, there is also 
less impetus for the VIX to come down. There are several trading 
days left for the market to move before the weekend, giving long 
option holders lots of trading opportunity before the weekend, 
which brings 3 days of time decay.  

In another bearish development, the bullish percent of the Nasdaq 
100 ($BPNDX), which had been on an upward tear since the 
beginning of July, finally relented.  This index has historically 
led the overall market.  Since the beginning of July, the index 
had soared from a low of 8%, which represents the number of 
companies in the index which are currently giving buy signals, to 
a high of 35%.  This bullish indication had provided some hope 
that the rest of the market may follow, as it had done in the 
past.  Now the NDX bullish percent has fallen back to 28% after 
dropping to 31% last Friday.

Be aware of the potential for a bounce back, but also view this 
as a possible shorting opportunity.  With no lack of bad news and 
warnings, any bounce could simply be a pause before the fall. 

Steven Price
Contact Support
Did this commentary help you?
We appreciate your comments.


********************
INDEX TRADER SUMMARY
********************

WHERE'S THE BOTTOM? 
by Leigh Stevens

TRADING ACTIVITY AND OUTLOOK - 
This is not my question these days - the market will bottom where 
it wants to - but the biggest preoccupation of the business media 
talking heads today! Which raises the question - can there be a 
bottom when everyone is asking where it is?  

Better would be saying that stocks are a horrible investment and 
everybody standing around like a deer in headlight had better 
RUN! This latter would tend to be more the mind set when most 
markets do bottom.  

You'll notice if you think back to those exciting times - that at 
the TOP of the market, we didn't hear endless talking heads 
musing about "WHERE IS THE TOP!"  No, we heard things like 
amazing, it’s a new "paradigm", a new economy and a new world!  
Seems slightly funny, if not a bit tragic, now doesn't it?! 

I'll be the first to admit that technical analysis is not any 
failsafe guide or major helpmate on final "blow off" stages of 
MAJOR bull or bear markets - this because technical analysis 
works with statistical probabilities and the like - in other 
words, in a more "normal" trading market situation. 

In this kind of market, the last vestiges of profit are made by 
those who buy every dip on blow off tops and sell every rally - 
or, sell on MOMENTUM even if the market is already had a HUGE 
move. 

Of course, there is a point where THIS approach doesn't work 
anymore, but tell that to the traders who are acting as if no 
decline will be the last one, as if there is no end to it - well, 
actually, there is an end to the downside - at ZERO.  

And, with volatility now so high  - more on that in a moment - 
even the gung-ho "momentum traders" are not always translating 
every correct move in terms of being right on market direction 
with put premiums being so high, creating a big cost of entry 
into long options positions - time to maybe SELL puts? 

As I noted today on the Market Monitor, volatility as measured by 
VIX continued to climb today, reaching a high, as of the closing 
hour, at 49.7 - VIX has not been this high since the "blow off" 
top reading on 9/21. On that date VIX climbed to as high as 57.3, 
but closed 48.3. Stay tuned!      


S&P 100 (OEX) Index - Daily/Hourly charts:


 S&P 500 (SPX) Index - Hourly chart:
 
A new (temporary?)low 30 points under the old one doesn't seem 
like that much, but in this case, each further 30 point slide 
becomes a larger and larger percentage move on the "incredible 
shrinking" OEX.  Because of a tendency for moves to the even 
100/1000 levels, 400 is probably a next downside objective. The 
S&P 100 Index has gone from a relatively steep decline to a VERY 
steep decline, a highlighted by the much steeper slope to the 
recent downtrend channel.  

It can't go on forever of course, but there is a meltdown going 
on in the sectors and the S&P and Dow - the sectors and averages 
holding up relatively better are now playing catch up.  

Since I play the odds, I'll take the bet that the market makes 
some kind of tradable bottom in the 400 area - and, it was just 
such a short while ago that resistance was apparent in the 500 
area - now, a further 20% decline later! - OEX is now within a 
hiccup of 400. So, it may be 395 or it may be 401, but the old 
market "rubber band" is stretched out pretty tight.  

420 is near resistance, than 430-435. 

S&P 5100 (SPXOEX) Index - Hourly chart:


 

Same could be said about SPX, as with OEX - at 813, at today's 
lows, can 800 be far behind!  I would take a bet to buy in that 
area to, at least for the ol proverbial "bounce" - a double 
bottom at 813 would do for a possible low also, but fear & 
loathing of stocks appears too high for this more "mild" 
scenario. 

Likely resistance comes in at 842, then in the 850 area. 

Dow Index (1/100: $DJX.X) - Daily/Hourly charts:


  

77.2 in DJX as a low would not seem to be where I would expect 
this hurtling bear express to stop at.  I think you have many 
traders now looking back to the several lows made in the 7400 
area in the DJIA back in late-1997 and during the 1998 period. I 
don't see any "natural" support where we have gotten to today. 
Hey, a market to tell our grandchildren about!  

7500 (DJX 75.5) is an area that they have in mind on the floor as 
a possible closer by support. Time will tell - if a tradable low 
is made tomorrow, the low end of the DJX hourly downtrend channel 
comes in around 76.5 early in the day and 75.8 by the end of the 
day.  

Overhead resistance is at 80.3, then 81.7.        

Nasdaq 100 Trust Stock (QQQ) Daily/Hourly charts:


 

We’re still locked in the Q's near-term trading range - well, QQQ 
expanded the low end of this range to 23.1 today, down a bit from 
the prior 23.5 bottom.  So much for the "emerging" up trend 
channel - it went BY, BY!  

I would pay attention to the well-defined downtrend (dashed blue 
line) line on the hourly chart. Today, the rallies failed 
(reversed) right at this first technical resistance in QQQ. 

The same pattern was repeated in QCOM and ORCL - these have the 
"better" looking charts (followed by INTC and NOT by weak-looking 
MSFT and CSCO) technically for a bullish Nasdaq 100 case - 
rallies that reached an area of down trendlines fell apart 
pronto. 

We start tomorrow with resistance implied by the aforementioned 
steep down trendline on the hourly chart intersection at 23.7. 
24.5 looks the next level of chart resistance - the Q's I think 
need to clear this level to get some upside traction.   

The 23-23.25 area looked like support today; next comes 22.5.  
One thing about the Q's in such an oversold tech market, is that 
the stock will only go against you slowly if you attempt to buy 
at what looks like a bottom - so, you bleed slowly, rather than 
hemorrhage in owning the stock itself.  As long as you adhere to 
an exit point, that is.  I modified my long QQQ stop-loss point 
today to 23.3, down a notch from 23.50 where I begin my "long" 
but brief journey.  

However, ONCE (LOWERing a stop) was enough - to try to stay "out 
of the way" that is - and I was gone peacefully.  In case of a 
rout I don't have the "blood" of little old ladies 
trading/options accounts on my hands. Really, we can buy again if 
the time again seems right this week.


Leigh Stevens
Chief Market Strategist 
lstevens@OptionInvestor.com


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TRADERS CORNER
**************

Failure Is A Good Thing!
by Mark Phillips
mphillips@OptionInvestor.com

Most lasting lessons in life are the results of errors or mistakes
that we learn from.  The world of trading is no different.  It is
just that the pace of education seems to be much faster in this
Internet-centric world.  Our job is to learn from and adapt to
the changing marketplace, making us into leaner and meaner
trading machines.

Long-time readers know that I'm what could be termed a Technical
Analysis Junkie.  If there is a new technical indicator that I
stumble across, I can't wait to put it to the test.  But after
several years in this business, I have come to realize that there
is very little that is actually new.  Not only that, but some of
the best trading signals come from very simple tools that are
among the first we all learned when we began to trade.

Chart patterns are among the most ubiquitous of tools used for
Technical Analysis, and when properly applied, can be a tremendous
help in our pursuit of profits.  The key is to learn how to use
each of these tools properly and then learn through observation
how they work in the real world of trading.  Then all we have to
do is select the patterns that fit our own particular style of
trading and put them to work.

When looking for reliable chart patterns, one of my favorites is
the channel, whether ascending, horizontal or descending.  Trading
such a channel is both reliable and easy to execute.  The past
several months I had a fair amount of success trading the
ascending channels on both PG and JNJ until those patterns failed
to work.  

As a quick refresher for the newbies in the audience tonight, a
channel is made up of 3 lines.  The upper channel line is made by
connecting 2 or more highs.  The lower channel line is drawn
parallel to the upper channel line and is made by connecting 2 or
more lows.  Then the middle line, as its name implies is parallel
to and in the middle of the other two lines.

Trading the channel is a fairly straightforward affair, with
principal buy points occurring on a rebound from the lower channel
line and principal sell points occurring on a rollover at the
upper channel line.  Risk management is easy to implement with a
stop just the other side of the respective channel line.
Secondary entry points are offered when the price crosses over
the middle channel line enroute to testing one of the boundaries
of the channel.

Here's what the chart of PG looked like prior to the breakdown
out of the channel a couple weeks ago.  As you can see, trading
the inflection points I have indicated on the chart below could
have netted a series of profitable trades over several months.
Primary Buy signals are denoted with a 'B', Primary Sells with an
'S', Secondary Buys with a 'b' and Secondary Sells with an 's'.
The chart is necessarily course (weekly timeframe) due to the
length of the channel prior to its breakdown.

Weekly Chart of Proctor & Gamble (PG) - Ascending Channel


 

But my intent here tonight is not to tell you how to trade a
simple ascending channel.  Any number of Technical Analysis
textbooks can do that better than I.  Now I can't remember where
I read it, but somewhere I ran across a note that pointed out
that one of the most powerful chart pattern trading indicators
is when that pattern fails to perform as expected.  At the point
that the pattern fails, that failure should be taken as a strong
indicator to change directions.  My recollection is that when I
read this little note, it wasn't a main point.  It had the
emphasis of a final miscellaneous comment or footnote.  The
reason I want to stress it here tonight, is that I believe using
the FAILURE of the channel is far more powerful and profitable
than trading the channel while the pattern is working.

Let's go back to our PG chart and I think you'll see what I mean.
Since I don't need to show the entire length of the channel, but
just the breakdown, I've reverted to the daily timeframe for
clarity.  The channel we looked at in the weekly chart is the
same one you can see at the bottom of this second chart.

Daily Chart of Proctor & Gamble (PG) - Broken Channel


 

Now here's the question: would you rather make $30-40 over a
period of a year trading in and out of the channel, or make $15
on the breakdown over a period of 2 weeks.  Do the math and I
think you can see the power of looking for failure on an
ascending channel.

And lest you think this particular chart is a fluke that I
managed to ferret out, take a look at the next few charts.

Weekly Chart of Johnson & Johnson (JNJ)


 

Work all year to eke out a $20 gain or sit and wait for the
breakdown that produces the same profits in 2 weeks?  I'll take
the latter option, thank you very much!

Daily Chart of WalMart (WMT)


 

This one is one of my favorites because it is so easy to see
the perfect setup.  WMT broke down out of the channel that began
after the September lows and that was our initial signal to
look bearish on the stock.  But look how it came up 2 weeks
later to just kiss the bottom of the channel.  I call that the
'Kiss of Death', because it sent WMT into a death spiral from
which it still hasn't recovered.

Here's one last example before I wrap this up.  PEP was riding
in a gently ascending trend for over a year before the breakdown
came.  But when the channel broke, there was nothing to hold the
stock up.  Just 5 weeks after the initial breakdown, PEP has now
given up more than 2 years of slow, methodical gains.

Weekly Chart of Pepsi (PEP)


 

You'll note that all of these examples represent bearish trades
and that is to be expected in a bear market.  As you have
probably discovered at some point in your education in the stock
market, stocks go down faster than they go up, which makes this
pattern all the more powerful.  I'm not exactly sure why the
reaction is so drastic when a stock finally breaks down out of
its channel, but I liken it to re-enabling the law of gravity.
In a bear market, gravity is pulling on all stocks, trying to
drag them back to earth.  The ascending channel acts as a
gravity-inhibitor (wouldn't you like to get ahold of one of
those?), keeping the stock aloft.  But when a crack appears and
the stock falls out of the channel, gravity comes back into
play, only double!

These trade setups don't come along every day, as good channels
take months to build.  During that period of time, I'm more than
happy to trade the pattern as the textbooks point out.  But when
the pattern fails, that is the time when I really want to pay
attention.  Big profits are likely just around the corner.  See,
I told you failure could be a good thing!

Have a great week!

Mark


***********************
INDEX TRADER GAME PLANS
***********************

THE SECTOR BEAT - 7/22
by Leigh Stevens


The investment "furies" are turning their destructive energies to 
the sectors that were the shining lights in the first half 
decline.  Hell hath no fury like a scorned ... bear! - a not so 
improved upon quote from the English Bard.

I'll highlight two sectors with trading implications - Chip stocks 
(SOX) that has resisted further decline and Gold & Silver stocks 
(XAU), dashing hopes and belief in the "safe haven" theory. 

While I like to believe in a port in every storm, trust in the 
yellow & silver metals was not enough in the marketplace, where 
ALL sectors were punished today by the fully roused angry bears. 

UP on Monday - 

It must be a bottom! - first day that I recall when not ONE of the 
many and main sectors I follow, were NOT up on the day.   

DOWN on Monday - 


 

As I noted - the investment "furies" were full bore onto the 
sectors that were the bright spots in the first half 2002 decline 
-	at least this was the case with the "top-4" on my most declined 
-	list.   
  
SECTOR TRADE RECOMMENDATIONS & REVIEW -

NEW/OPEN TRADE RECOMMENDATIONS -

NONE


OPEN POSITIONS - 

NONE

 
TRADE LIQUIDATIONS -

Sold SMH (bought at 28.30) at 28.00 on liquidating sell stop   
(Semiconductor HOLDR's) 


SECTOR HIGHLIGHT -

Semiconductor Sector Index ($SOX.X)
STOCKS: AMAT; AMD; CMOS; CREE; IDTI; INTC; KLAC; LLTC; LSCC; 
LSI; MOT; MU; NSM; NVDA; NVLS; PMCS; RMBS; TER; TXN; XLNX


 

The SOX halted its slide before the index fell all the way back to 
the 344 support area that has buoyed this sector on prior 
occasions - last Sept., then again twice more - in late June and 
early-July. How many times does SOX have to get down to this area 
before it can mount a sustained rally? - maybe awhile! - lack of 
selling can "make" a bottom, but only buying will create a rally. 

At least I would think, this sector would be a good candidate to 
rally ahead of the Nasdaq market for when it does turn.  Usually 
when a sector, or a stock within a sector, "resists" a downturn 
against most everything else which is heading south (down), this 
will be the one rallying ahead of the overall market when the 
market has a rebound.
UPDATE: 7/22   

Gold & Silver Sector Index ($XAU.X)
STOCKS: ABX; AEM; AU; FCX; GOLD; HGMCY; MDG; NEM; PD; PDG; SIL


 


Not much to say on XAU, except that today realized more of the 
downside potential I was seeing in the Gold & Silver sector – 
especially after the reversals in XAU rallies that fell short of 
taking out down trendline resistance, first in 80 area, then 77. 

My longstanding downside target zone has been to the 65 to 62 
area.  With the close on the low today and sharp disappointing 
fall to the many "Gold bulls", expect some possible downside 
follow through tomorrow into an area at or below 65. Once XAU gets 
into this zone, at least partial profit taking is probably good 
trading money management on XAU puts held from higher levels.    
UPDATE: 7/22

Leigh Stevens
Chief Market Strategist
lstevens@OptionInvestor.com


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The Option Investor Newsletter                   Monday 07-22-2002
Copyright 2002, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


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*****************
STOP-LOSS UPDATES
*****************

BLL - put
Adjust from $38.50 down to $36.50

CTX - put
Adjust from $51 down to $47

EBAY - put
Adjust from $62.50 down to $60.25

LEH - put
Adjust from $59 down to $56

LOW - put
Adjust from $40.60 down to $38

UPS - put
Adjust from $70.25 down to $66

VZ - put
Adjust from $37.75 down to $31


*************
DROPPED CALLS
*************

STM $23.25 -0.76 (-0.76) Once again, the Semiconductor stocks
made a valiant attempt to lead the Technology sector into positive
ground, but the drag of the broader market was too much to
overcome and the SOX swooned into the close.  Shares of STM
followed suit, drifting down find support near the $23 level.
While the stock held support today, we don't have any more time
to wait for the rally we've been waiting for.  STM announces
earnings tomorrow after the closing bell, and we don't want to
get caught on the wrong side of a downside earnings surprise.  A
rebound in the Chip sector is playable with a bounce in STM off
the $23 level tomorrow, but make sure to exit all positions
before the closing bell.


************
DROPPED PUTS
************

INVN $24.57 -0.64 (-0.64) The week kicked off with another dismal
day for INVN, although its 2.5% loss was nothing compared to the
carnage seen in many sectors of the market.  While the stock
closed on its lows, which likely points to more downside ahead,
it is time to leave this successful play.  The company is set to
report earnings tomorrow after the closing bell, and that means
it is time to move to the sidelines.  Use follow-through weakness
in the morning to close out open positions ahead of earnings.

SBC $23.96 -2.72 (-2.72) Giving our SBC play that last push over
the cliff this morning was BLS missing earnings and reducing their
forecast for next quarter.  That sent SBC tumbling through support
and the stock dipped briefly below the $23 level in the morning.
Although there was a decent bounce off that low, the stock still
ended the day with another 10% loss.  With SBC reporting earnings
in the morning, all positions should now be closed as we shift
our attention to the next winning play.

VZ $28.65 -3.85 (-3.85)  VZ has taken quite a dive since it was 
originally picked almost 10 days ago at $35.30.  The stock dropped 
$3.85 today, to our target and then some.  As we recommended on 
today's Market Monitor, we see this as an opportunity to take 
profits, as the telecom sector has been beaten quite badly and may 
be in for some sideways movement.  SBC Communications has earnings 
coming out tomorrow, and with bad news any continued slide should 
be viewed as an added profit opportunity.


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*********************
PLAY OF THE DAY - PUT
*********************

LEH – Lehman Brothers Holdings $52.50 -1.97 (-1.97 this week)

Company Description:
Through its subsidiaries, LEH constitutes one of the leading
global investment banks, serving institutional, corporate,
government and high-net-worth individuals clients.  The company
is engaged primarily in providing financial services, including
securities writing and direct placements, corporate finance and
strategic advisory services, private equity investments and
securities sales and trading.  Completing its array of banking,
research and trading capabilities, LEH also engages in the
trading of foreign exchange, derivative products and certain
commodities.

Most Recent Write-Up:
To say that the Brokerage sector (XBD.X) looks sickly would be
an understatement.  One failed rally attempt after another has
dragged this group lower each week and with Friday's drop, the
index is sitting at its lowest level since late September.  Poor
market action, concerns about investor litigation and falling
revenues due to less trading is all having its effect, and the
net result is that investors want out of these stocks.  This is
clearly the case with shares of LEH, which broke down under the
$56 support level last week and is precariously close to violating
its $54 support, also the site of the 2% retracement of the fall
rally.  A quick look at the Relative Strength chart shows that
until recently, LEH was holding up better than the XBD, but now
it is playing catch up to the downside.  That gives us a great
setup for a new put play.  While another oversold rebound would
make for the best entries (ideally on a failed rally near the
$57-58 resistance level), given the predominant market weakness,
a breakdown under $54 may offer the next viable entry point.  The
PnF chart tells a similar story of weakness, with last week's
fresh sell signal giving us a tentative price objective of $47.
We are initially setting a fairly wide stop at $59, just in case
we get the bounce before support fails.  

Comments:
Volatile markets make for exciting times and lots of opportunities
for nimble traders.  LEH got the week off to an exciting start by
plunging with the rest of the market at the opening bell.  Our
first entry opportunity came as the stock fell under the $54 level
and that was good for a $2 drop before the afternoon
short-covering rally.  Traders looking for a second helping
weren't disappointed as the rally topped out right at $54 before
the bears took another run at the $52 level.  Stepping back to
look at the big picture, the $54 support level has now failed and
it looks like intraday rallies back near this level will provide
attractive entries into the play when the sellers lean on the
stock again.  The next solid level of support looks to be $50
and judging by the poor performance of the Broker/Dealer index
(XBD.X), which closed at its lows after shedding more than 4%, we
likely won't have long to wait.  More weakness in LEH tomorrow
could generate a fresh entry point on a breakdown under $52, but
keep the trade on a short leash just in case of another
short-covering rally.  We are lowering our stop to $56 tonight.

BUY PUT AUG-55 LEH-TK OI=1380 at $4.60 SL=2.75
BUY PUT AUG-50*LEH-TJ OI= 824 at $2.25 SL=1.00

Average Daily Volume = 2.59 mln



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**************
MARKET POSTURE
**************

No support!  Don't dig out those gold fillings just yet.

To Read The Rest of The OptionInvestor.com Market Watch Click Here
http://www.OptionInvestor.com/marketposture/072202.asp


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